National Income

Question 1

What is the circular flow of income?

Answer 1

The circular flow of income is an economic model that illustrates money flows in an economy
There is a simple model which shows the money flows between households and firms
There is a more complex model which adds in other economic agents including the government, financial sector and foreign trade (net exports)

Question 2

Describe a circular flow of income diagram

Answer 2

Households own the wealth in the economy
These are the factors of production
Households supply their factors of production to firms and receive income as a reward
They receive rent for land, wages for labour, interest for capital, and profit for enterprise
With this income, they purchase goods/services from firms
Firms purchase factors of production from households
They use these resources to produce goods/services
They sell the goods/services to households and receive sales revenue
National income is the value of the output of an economy over a period of time
It can be calculated using the income approach or expenditure approach
Expenditure = income

Question 3

Difference between income and wealth

Answer 3

Income is a flow in the economy, whereas wealth is a stock of assets that can be used to generate income